Disparate impact is best understood in contrast to disparate treatment. Disparate treatment is, in essence, intentional discrimination. In the context of compensation, it occurs when a firm (for example) intentionally pays women less than men or gives them fewer benefits than men get. By contrast, disparate impact has nothing to do with the firm’s intentions. Instead, it has to do with the impacts of the firm’s policies.

For example, let us imagine that a firm decides to pay bonuses to its salaried managers who are consistently able to stay late at work. These employees are salaried, so they do not get overtime, but they are rewarded in the form of substantial bonuses for their dedication. This does not appear to be a case of disparate treatment because the firm is not singling out one race or one sex for preference. But what if this policy ends up causing men to be paid more than women? Let us say that women typically have to leave work at the regular quitting time to get their kids from daycare. Therefore, women tend not to get the bonuses even though the bonuses are theoretically open to men and women equally. This is disparate impact. Disparate impact occurs when a policy that is, on its face, neutral in terms of (for example) race or sex ends up affecting people of different races or sexes differently.